‘Economically reckless’ to not lift minimum wage

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May 27 2021
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Failure to lift the minimum wage would be morally indefensible and economically reckless, leading to a K-shaped recovery that is good for some but bad for others, a think tank has said.

A new report by Per Capita exposes the dangers to the Australian economy if the government and business leaders fail to lift wages.

Consumer spending took a massive hit during the pandemic, falling from 55 per cent of GDP to 50 per cent, with the sudden reduction heavily impacting the retail and hospitality sectors especially, with the government relying on a lift in spending to boost the economy.

In fact, much of the Treasury’s forecasts made during the 11 May budget rely on consumption lifting to 5.5 per cent over the year as businesses restart, offsetting the losses in spending due to border closures.

The Treasury also expects inflation of 3.2 per cent this year, but is predicting wages growth of 1.25 per cent, meaning lower and middle-income earners will have a fall in disposable income.

“Higher wages for low and middle-income earners translates directly to more consumer spending in local economies,” the report said.

“Put simply, if people don’t have enough hours of work, or if their hourly rate of pay is insufficient to meet the growing costs of living, they won’t have sufficient money to spend into the economy.”

Australia’s minimum wage currently sits at $19.84, with the Fair Work Commission advised not to lift wages on businesses that are trying to recover from the pandemic.

While Per Capita argues that wages need to grow, the Fair Work Commission has been asked to show ‘restraint’ when lifting the minimum wage increases, with some prominent businesses lobbying for any increase to be capped at 1.1 per cent – well short of inflation estimates.

This is leading to 2.2 million Australians being negatively impacted by the wages remaining stagnant, which is predicted to have a negative flow-on impact for the greater economy.

The K-shaped recovery

Per Capita highlights that Australia is in danger of having a K-shaped recovery, which is good for some while bad for others.

“Beyond this unequal outcome between workers, however, is a larger and more pernicious source of inequality, one that has been growing for years and which the pandemic has made worse: that between those who earn their income from labour (workers) and those who rely on capital returns (the holders of assets, particularly owners of medium and large businesses, both privately and as shareholders),” they stated.

The report found that Australia’s macroeconomic recovery has been strong compared with the dire forecasts but remains in danger of being a K shape rather than V, that is, some people will do very well, while others will fall deeper into insecurity and poverty.

“If Australia is to realise the benefits of its successful management of the pandemic, and restore our economy quickly, sustainably and fairly, this obsolete economic thinking and narrow self-interest must be defeated,” the report concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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